Chapter 11

Working Group Proposals #12: Prepackaged Plans of Reorganization

At its May session, the chapter 11 Working Group devoted a substantial amount of time to discussing prepackaged plans of reorganization. Prepacks constitute a significant percentage of the bankruptcies filed by publicly held corporations. [ FN: According to the 1997 Bankruptcy Yearbook & Almanac, over 20% of bankruptcies of publicly held companies filed in 1993 were filed (and completed) as prepacks.] While they have become more prevalent in the 1990s, the notion of a prepackaged bankruptcy far pre-dates the enactment of the Bankruptcy Code of 1978.

A prepack can have significant advantages over either a traditional chapter 11 case or an out-of-court restructuring, especially for a company that does not need to repair operational problems with the extended use of bankruptcy tools. Unlike a restructuring that takes place fully-out-of-court, a prepack allows a company to minimize the leverage of holdouts and to reach and effectuate an arrangement that satisfies the majority of creditors. Unlike an ordinary chapter 11 case (in which the debtor files, obtains approval of its disclosure statement, solicits votes, and seeks to have the plan confirmed), a company in a prepackaged chapter 11 case does much of the work before entering the bankruptcy system. It negotiates and solicits votes on a plan, then files for bankruptcy with the potentially confirmable plan in hand. This enables the debtor to confirm a plan and emerge from bankruptcy within a few months or less.

The use of prepackaged plans of reorganization is consistent with the goal of encouraging swift and successful reorganizations with lower transaction costs. [ FN: See, e.g., Prof. James J. White, "The Virtue of Speed in Bankruptcy Proceedings, " Testimony before the National Bankruptcy Review Commission, p. 6, May 14, 1997 (concluding that "speed is an antidote to many of the substantive ills in chapter 11. That speed will benefit not only secured creditors, but unsecured creditors as well, "); accord Neal Batson & Matthew W. Levin, "Prepackaged and Pre-Negotiated Plans of Reorganization, " submitted in connection with New York University School of Law 21st Annual Workshop on Bankruptcy and Business Organizations, (1995) ( "[a] prepackaged or pre-negotiated bankruptcy plan may avoid some of the delay and expense inherent in the more typical chapter 11 bankruptcy process ").] These narrowly-tailored proposals are intended to facilitate the prepack process to the benefit of all parties involved.

Working Group Proposal #12: Prepackaged Plans of Reorganization

Section 341 Meeting of Creditors

In a prepackaged bankruptcy case, a business comes into the bankruptcy system ready to confirm a plan. Rather than negotiating under the protection of chapter 11, the debtor files a petition with most of the difficult negotiation already completed. Conceivably, the majority of the creditors have accepted the proposed plan, and the debtor merely needs one or more of the legal mechanisms that Title 11 provides to effectuate the agreement, perhaps to bind minority dissenters or to wipe out old equity. In such a case, the section 341 meeting of creditors, which currently is mandatory, can delay confirmation significantly without fulfilling its intended function.

The Recommendation

Section 341 should provide that upon the motion of any party in interest in a chapter 11 case that entails a prepackaged plan of reorganization, the court may waive the requirement that the U.S. trustee convene a meeting of creditors.

Reasons for the Change

Section 341 of the Bankruptcy Code requires the U.S. trustee to convene a meeting of creditors in every bankruptcy case. [ FN: 11 U.S.C. §341(a) provides that "[w]ithin a reasonable time after the order for relief in a case under this title, the United States Trustee shall convene and preside at a meeting of creditors. "] The Federal Rules of Bankruptcy Procedure establish that the meeting must be held within twenty to forty days after the court enters an order for relief. [ FN: Federal Rule of Bankruptcy Procedure 2003 requires twenty days notice for section 341 meetings and Federal Rule of Bankruptcy Procedure 2004 provides that the meeting shall be called no less than 20 days and no more than 40 days after the order for relief.] In theory, this meeting provides creditors with a meaningful opportunity to examine the debtor and obtain important information. However, when parties have negotiated and voted on the plan before the debtor even filed a bankruptcy petition, creditors are not likely to receive any significant benefit from the section 341 meeting. In some prepacks, the U.S. trustee convenes section 341 meetings only to comply with section 341. In other prepacks, the U.S. trustee does not hold section 341 meetings, which technically violates section 341.

Holding the section 341 meeting in this context entails an unnecessary and costly time delay. In a case that otherwise could be confirmed in a day or two, the notice and scheduling requirements for a section 341 meeting can forestall confirmation for at least twenty days. One participant at the Working Group session explained that the time delay is particularly crucial in a case with transnational implications because of the risk that local authorities in other countries will seize assets of the estate if the case is not resolved on an expedited basis.

Although the efficacy of the section 341 meeting has been questioned in many contexts, this proposal addresses only the narrow situation of a prepack. This proposal would preserve the court’s discretion to deny a request for a waiver of the meeting.

Competing Considerations

Some might argue that the section 341 meeting serves a structural function and thus should not be subject to waiver, even with court approval.